By Leika Kihara
TOKYO (Reuters) -Japan’s economy shrank for the first time in a year and at a faster pace than expected, data for the March quarter showed on Friday, underscoring the fragile nature of its recovery now under threat from U.S. President Donald Trump’s trade policies.
The data highlights the challenge policymakers face as steep U.S. tariffs cloud the outlook for the export-heavy economy, particularly for the mainstay automobiles sector.
Real gross domestic product (GDP) contracted an annualised 0.7% in January-March, preliminary government data showed, much bigger than a median market forecast for a 0.2% drop.
The decline was due to stagnant private consumption and falling exports, suggesting the economy was losing support from overseas demand even before Trump’s announcement on April 2 of sweeping “reciprocal” tariffs.
The data did highlight some brighter aspects, which included GDP growth being revised up slightly to 2.4% from 2.2% for the final quarter of last year.
Capital expenditure rose a faster-than-expected 1.4%, helping domestic demand add 0.7 percentage point to GDP growth.
Overall, however, analysts were cautious about the softer demand impulse and risks to the outlook from a Trump-led change to the global trade order.
“Japan’s economy lacks a driver of growth given weakness in exports and consumption. It’s very vulnerable to shocks such as one from Trump tariffs,” said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute.
“The data may lead to growing calls for bigger fiscal spending,” he said, adding the economy could contract again in the second quarter depending on when the hit from tariffs intensifies.
On a quarter-on-quarter basis, the economy shrank 0.2% compared with market forecasts for a 0.1% contraction.
TARIFF RISKS
Japan’s Economic Revitalisation Minister Ryosei Akazawa said big pay hikes offered by companies will likely underpin a moderate economic recovery, but warned of risks to the outlook.
“We must be mindful of downside risks to the economy from U.S. tariff policy. The hit to consumption and household sentiment from continued price rises is also a risk to growth,” Akazawa told a news conference after the GDP data.
Private consumption, which accounts for more than half of Japan’s economic output, was flat in the first quarter, compared with market forecasts for a 0.1% gain.
The GDP deflator, which shows the extent to which firms are able to pass on rising costs, rose 3.3% in January-March from year-before levels, accelerating for second straight quarters.
